News Analysis: Economic challenges await Singapore after election

After winning a landslide victory in general election on Saturday, Singapore's ruling People 's Action Party is facing challenges brought by the country's sluggish economy with no easy solution in sight, analysts said.

Labor-related issues such as immigration policy and job opportunities for local residents have continued to be the hot topics discussed during the election campaigning period. In response to public discontent with plans to increase immigration, the Singaporean government had put in place tighter restrictions on the employment of foreigners over the past few years, which resulted in a tight labor market in the city state.

There are signs that the curb on the employment of foreigners has taken its toll on the economic performance of Singapore. Its economy contracted by 4.6 percent in quarter-on-quarter seasonally adjusted annualized terms in the second quarter. But most astonishing was the broad-based nature of the outcome. Contraction was occurring in manufacturing, as well as in the service sector.

According to BMI Research, part of financial information service provider Fitch Group, the more labor-intensive producers in particular are struggling under the yoke of tighter hiring criteria and higher levies for foreign workers, which in many cases have forced these producers to decide between throttling production, or cutting into their profit margins by hiking wages. As for the service sector, the hospitality sector has also been hard-hit by more restrictive policies of hiring foreigners.

BMI expects this situation is unlikely to resolve itself over the coming quarters. Instead, Singapore's economic restructuring initiatives will take many years to work themselves out, as the country had by 2010 become quite heavily dependent upon the consistent supply of foreign workers across all skill levels.

Capital Economics, an independent macroeconomic research firm, highlighted the policy dilemmas with regards to the labor crunch issue. As more Singaporeans have entered the labor force, the resident labor force participation rate rose from 66.1 percent in mid-2011 to 67 percent in mid-2014.

Capital Economics said this may be the desirable outcome of the government's effort to boost the local labor force participation rate, but there is a limit to how far it can go. The average labor force participation rate for high income countries is much lower than Singapore's, at 61 percent.

While stricter immigration policy will likely continue after the election and lead to higher wages due to labor shortages, and the government hopes to help boost the wages of low income Singaporean workers, Capital Economics warned the gains in nominal wages will be eroded if employers decide to pass on the increase in wage costs in the form of higher inflation.

This makes efforts to improve productivity growth essential to the success of Singapore's shifting growth model. If firms can raise the productivity of their workers, there will be less need to pass higher labor costs onto consumers. Likewise, productivity gains would help exporters retain competitiveness in the face of rising wages. The government is more than aware of this, and has been stepping up policies to boost productivity for several years now.

Capital Economics said there is limited room for further productivity gains in Singapore at its current stage of development. Average labor productivity growth in advanced economies was just 1.3 percent in the last two decades. Growth of around 1.5 percent over the coming decade is about the best Singapore can hope for, said Capital Economics. Endi